What's the Magic of Private Equity?

Long gone are the (good ol'?) days when tech companies appeared to advance their product/service concept from a cocktail napkin-based business plan to Wall Street without skipping a beat.

We can all rattle off dozens of companies that went public prematurely. Today, however, unless you're the hottest, customer-laden social-media outfit with more than a reasonable expectation of success, an IPO is probably not in your future anytime soon.

Financing alternatives currently run the gamut, from bringing on partners with very deep pockets to taking on yet another round of late-stage VC investment. The newer kid on the block that might start to appear more often, though, is the private equity (PE) deal.

As the term suggests, private equity involves the purchase and management of an equity stake on behalf of investors. Instead of public shares as a result of an IPO, however, institutional investors including pension funds, high net worth individuals, and insurance companies, for example, put money into a fund created by a private equity company. The fund uses this money, adding debt if necessary, and the experience and knowledge of its team to invest in companies, or build corporate entities.

What's key to these investments is that PE firms aim to create long-term value, rather than turn a quick buck. They typically purchase a whole company, rather than a percentage of it, and provide the company the one element that most other types of investment lack -- time.

Light Reading is not alone in believing that the optical networking sector is on the uptick -- PE firm Marlin Equity Partners , which has more than $2.6 billion of capital under management and a track record of more than 70 acquisitions, clearly is of the same mind. It has spent the past 18 months or so building Coriant , a global supplier of optical transport, OTN switching, and software-defined service control and management solutions, through a series of strategic acquisitions based around the optical unit of Nokia Networks (NSN) and the subsequent purchase of Tellabs. (See Coriant Launches Dynamic Optical Cloud and Qualcomm Buys HP Mobile Patents.)

Tellabs CEO Kelly Out as Brand Goes Bye-Bye (Tellabs merged into Coriant, with Bob Leggett named as chairman, Pat DiPietro as CEO, and Herbert Merz as president and chief operating officer of the unified organization) – January 2014

Today, Coriant operates worldwide in more than 48 countries and is headquartered in Munich, Germany, with R&D centers in Asia-Pacific, Germany, Portugal, and the US, as well as a production center in Berlin.

According to Coriant's CEO, Pat DiPietro, "Innovation will continue to be critical to the optical components and optical systems market sectors. This has never been as true as it is today. We believe the rapid pace of innovation in end-user devices, applications and services is driving the need for equal or even greater innovation at the optical layer of the network. As the foundation for end-to-end connectivity for today's high-bandwidth applications, the optical network requires constant innovation in speed, reach and flexibility. This is not only about hardware-based innovation, but also software."

When asked about how he thought components innovation will be funded, DiPietro explained: "The concurrent demand for high-bandwidth mobile, video and cloud-based services and applications is creating a more robust ecosystem in the optical components market than we've seen for some time. We're seeing a lot of cutting-edge innovation coming from smaller startups backed by traditional venture capital investment models. We believe this line of funding will continue to fuel innovation in the sector."

DiPietro also said that publicly funded companies would continue to contribute to the sourcing options for end-to-end system suppliers such as Coriant. "That said," added DiPietro, "we believe private equity can be a viable funding alternative. What is critical, however, is for private equity firms to have not only the requisite capital resources, but also the patience for longer-term investing. After all, the long-term growth opportunity in the optical sector is tied to continuous innovation, as well as the competitive advantage that comes from taking innovation from lab prototypes to commercial adoption. This requires taking a long-term approach to investment and making a sustained commitment to R&D that enhances the long-term value of a company's customer offerings."

DiPietro points to the uniqueness of Marlin Equity Partners in that the company benefits from a business model that leverages deep in-house technical expertise, extensive industry experience, and an understanding of the innovation and R&D necessary to build Tier 1 optical networks. "We believe this model is required for private equity to be successful in this space," added DiPietro.

Private equity financing isn't new in telecom, but it's starting to become a more likely option, whether to cobble together smaller entities into one gigantic competitor, as has happened with Coriant, or to resurrect a less-than-stellar player that has good bones but performs in an underwhelming fashion.

Expect PE to be seen more often and more effectively, giving more time to its charges to transition, grow and contend than rivals under pressure from investors with near-term returns in mind.

Re: Success stories ? Yes, short term let's you see success or failure quickly--or does it? Many successes really do just take some time, especially when the company has seen any kind of disruption, or the industry has. It's refreshing to see any investments taken on for the long haul, especially with a PE company that actually has substantial experience in the industry where they're investing.

Re: Success stories ? I think the key here is "long term". It's very hard to ask for success stories on a project that has a long-term view. Typically, playing the long game is similar to bamboo -- it grows very little in the initial years and then grows extremely rapidly.

That's also what makes a long-term approach scary -- the quick-buck version lets one see success or failure quickly, but the long-term approach might mean that one waits around a long time just to see failure happen. At the same time, the long-term approach also pays off significantly better. Look at Apple. Anyone who invested in Apple and bailed before Jobs turned it around is probably still regretting the decision.

Re: Success stories ? These types of deals require a ton of money, and private equity can be a source of that money. Whether success or failure, these types of infrastructure plays require massive amounts of capital.

So, the magic is money. And I would question whether many of these firms have the experience to make the right choices.

Re: Success stories ? It's also beneficial when the PE firm has substantial experience in the industry involved--setting it apart from a business only deal and ensuring that there is the experience necessary to be able to hang in there for the long term.

Re: Success stories ? Generally the PE magic revolves round the domain knowledge,long term staying power and patience of extra-ordinary nature.I think consistently one aspect is ignored.That is the customer facing strengths of the Company in control.Brand Power of the company across the geographies,and track record on aggregation is very important too.Coriant has to exhibit this among other things! Vishnu Goel T&M +919810101238

Re: Success stories ? It's too early tosay whether Coriant is a success or not but the earky indications are that it has a very clear vision, a solid operational model and some very able individuals at the exec level, all of which are needed to stand a chance.

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